Investors are increasingly attracted to private assets, due to the uncertainty and volatility caused by geopolitical concerns and fears of a global economic slowdown, according to Schroders’ latest institutional investor study.
The Schroders Institutional Investor Study 2019 surveyed 650 institutional investors representing $25.4 trillion in assets. Although investor return expectations have remained largely steady over the past 12 months, the number of investors globally (57 percent) factoring in annual returns of 5 percent annualised over the next five years has dropped from last year (60 percent).
The appeal of private equity
A majority of institutional investors (52 percent) expect to raise allocations to private assets over the next three years, with investors in North America (58 percent) and Asia (50 percent) the most intent on doing so.
Investors cited the need to generate higher returns and portfolio diversification as the two biggest factors encouraging them to invest in private assets. The survey suggested that private equity was regarded as the source of greatest potential returns, with 69 percent of investors anticipating returns of over 5 percent.
Further supporting this view, out of the main private assets classes, 37 percent of investors worldwide are intending to increase their allocations to private equity. This is markedly higher than comparable intentions in the private debt, infrastructure equity and real estate sectors.
Investors however, did also cite the cost and complexity of fees as the greatest challenge to investing in private assets, and also flagged high valuations as the primary concern when investing in the asset class.
Political uncertainty and global slowdowns
The study identified an increasing apprehension among investors due to rising macroeconomic uncertainty and a growing concern about potentially long-term political situations, which was also resulting in investors continuing to focus on private assets.
More than half of investors (52 percent) believed that political events such as Brexit and the developing trade wars would affect portfolio performance over the next 12 months. This is a significant increase on previous results, when 32 percent of investors in 2017 and 44 percent in 2018 said such factors could influence portfolio performance.
Over a third of investors (37 percent) considered the global economic slowdown to be the biggest concern, significantly up on 27 percent a year ago. This theme of investor caution continues across emerging markets (EMs), with allocations dropping from 15 percent in 2017 to 10 percent this year. In addition, expected allocations towards EMs over the next 12 months have also slipped to 9 percent.
Interestingly, less than a third of investors (29 percent) are holding their investments for 3-5 years, with only 10 percent remaining invested for a full cycle. Interestingly, the results also showed that more than half (53 percent) of institutional investors argued there is a greater need for customised and bespoke products as off-the-shelf funds are failing to meet financial objectives.
Although the results suggested a general theme of caution, there is a widening gap between the comparatively bullish North America the more restrained approach from investors. Over three-quarters (77 percent) of North American investors are estimating returns of 5 percent, a marked difference to 42 percent of investors in Europe.
